Nick Scali (ASX:NCK): Its had a stellar 5 year run, but is it coming to an end?

Nick Scali (ASX:NCK) is the second company we’ve written about this week that is trying to expand into the UK.

Nick Scali has doubled in the last 5 years, and a big part of this growth can be attributed to the furniture boom during the pandemic. Its sales have doubled from ~$250m to ~$500m in that time and its profit has more than doubled. But maybe this run may be finally coming to an end.

History of Nick Scali

The company is named after the post-World War 2 Italian immigrant who came to Australia in 1955 aged 18. The first store was opened in 1962 on the Hume Highway in Ashfield. Nick had a son named Anthony who has since taken over the running of the business. It listed in 2004 at $1 per share for an $81m market capitalisation. Today, the company is capped at $1.4bn. Fair effort. Nick Scali also owns the Plush brand which has over 100 stores in Australasia.

It was a major beneficiary of the pandemic and locked down consumers shopped for items to spice up the home, whether to work from it or just reinvigorate their spaces. Although unlike companies like JB Hi-Fi (ASX:JBH) that sell products that need constant upgrades, furniture tends to be a once in a decade purchase (at least, barring extreme circumstances like natural disasters which destroy old pieces of furniture). For some time, sales held up, but they didn’t stay high forever.

FY24 and FY25 are proving not so easy

In its FY24 results, Nick Scali made $468.2m and an $82.1m profit. The trouble is, these were 8% and 19% lower than the year before on an underlying basis. Group EBITDA went down by 11% to $175m and EBIT was down 16% to $129.5m. The company reported that sales were higher, and its revenue was only down due to policies that only recognise revenue when it is delivered – so its FY23 results reflected increase deliveries in the immediate post-COVID period when there were hefty delays in deliveries.

In the first half of FY25, the company’s revenue was up 11% due to its expansion into the UK – more on that in a moment. But its group profit was down 23% to $33.2m. ANZ revenue was down 2% to $222.5m (UK revenues being $28.6m) and its underlying ANZ profit was $36m, down 16%.

Granted, this was above its profit guidance given at the AGM which disappointed investors. The company faced delivery problems because its main freight forwarder went into liquidation, restricting access to a container that had delivered goods.

Targeting UK expansion

In April last year, Nick Scali announced it was going to enter the UK market. It raised $46m to buy Fabb Furniture, a speciality retailer that has 21 stores in retail parks across the UK. Anthony Scali told the media he thought the UK market was A$24bn, and (if successful) his company could look to North America in the future.

Why enter the UK first? The company believes there’s less competition and that retailers have double sales per store than in Australia. And of course, the higher population. All Fabb Furniture brands will be rebranded as Nick Scali.

Investors have been skeptical that Fabb Furniture was the way into the market, rather than buying a larger company. Plus, the UK bore a terrible cost of living crisis. On top of this, some investors may remember Wesfarmers’ attempts to crack Bunnings into the UK which failed and a retreat happened within two years – what works in Australia may not work there.

The most recent update came last week in its results release. The company launched its online brand in the UK a few weeks prior to the result. It has refurbished and rebranded the first 4 stores and expects a gross margin of 41%. It aims to complete a further 8 in the first half of the calendar year and has reported that the top selling sofa in ANZ is the top selling sofa in the UK. As mentioned above, the company made $28.6m in revenue from the UK in 1HY25, although it will be a slow and steady journey.

If you want to bet on an ASX stock cracking Britain…

…we think it’d be safer to bet on Pexa. We see potential for it to build a significant market share due to regulatory changes. It is true that, Nick Scali has a more certain Australian business – although Pexa has a monopoly in Australia, no one knows how much longer it will last for. It will all depend on which jurisdiction is more important to investors.

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